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Bond Market Debate du Jour: Whither Bunds or Wither Bunds?

By

Matt Phillips

Jun 13, 2012 10:27 am ET

Tradeweb

Bund yields bounce.

A lot of chatter from the bond market cognoscenti this morning surrounding the the recent march higher of yields for German bunds. The euro zone’s premier safe haven asset has stumbled in price this month sending yields sharply higher. (Yields and prices move in opposite directions in bondland.) In fact, since the end of May, the Barclays Treasury bond index has lost 1.7%.

The reason this is interesting is because German bonds have tended to get a boost when the fears around the periphery flare up. But recently they’ve been getting hit alongside Italy and Spain. The reason? Some suggest it’s because investors are increasingly pricing in the fact that Germany is going to be on the hook to pay for the bailouts of its neighbors and their banking systems. John Loynes of Capital Economics in London writes Wednesday:

Ten-year yields have risen by over 30bps (to 1.5%) since the end of last month, while five year yields have almost doubled (to 60bps). Admittedly, that movement began when hopes were building of a decisive response to the problems in the Spanish banking sector, suggesting that it initially reflected a reduction in the demand for safe assets. Notably, though, the movement has continued even as those hopes have been replaced by disappointment and Spanish (and Italian) bond yields have rebounded. (See Chart 1.) In other words, the markets are starting to see bad news for the periphery as bad news for Germany too. If so, there would appear to be scope for this process to continue as the crisis deepens and the fork in the road to either fiscal union or break-up gets nearer.

On Twitter yesterday, Pimco bond guru Bill Gross wrote: “German Bunds join the maelstrom. Very few scenarios in which they do well. Only German exit favors Bunds.”

For the record, it’s worth pointing out that there may be some technical things going on in the bond market that are worth paying attention to. For example a few northern European countries — like Denmark and Sweden — have recently announced plans to ease regulations on pension funds to allow them to boost their returns. And some market observers say that could be helping to move the yields of German bonds higher, as those newly liberated pension funds try to find higher yielding bonds elsewhere.